July 3 (Bloomberg) -- Investor Simon Halabi’s real-estate companies failed to remedy a default on 1.15 billion pounds ($1.9 billion) of commercial mortgage bonds at a time when, according to Fitch Ratings, “pretty much” all such European deals would breach loan-to-value conditions if they were tested.

Halabi’s companies had until the close of business yesterday to stave off a default on bonds that repackage loans to nine London properties including JPMorgan Chase & Co.’s offices at 125 London Wall and 60 Victoria Embankment, according to debt administrator Hatfield Philips International Ltd. The issuer of the notes, White Tower 2006-3 Plc, had 10 days to remedy the default after the bonds breached covenants because the properties halved in value.

“With capital values having fallen on average by 43 percent, pretty much any loan that has a loan-to-value covenant if tested today would be in breach,” said Andrew Currie, head of Europe commercial mortgage-backed securities at Fitch Ratings in London. Most servicers of commercial mortgage bonds haven’t tested these conditions, “storing up trouble” for the future, he said before today’s announcement.

White Tower is the largest commercial mortgage bond sold by a single borrower to default this year in Britain, which is Europe’s largest market and accounts for about 50 percent of issuance, according to Fitch. Banks that financed a real-estate buying spree at the top of the market are weighed down with about 230 billion pounds of commercial property loans, data compiled by De Montford University show, making them unwilling to refinance existing deals when they come due.

Property Billionaire

Syrian-born Halabi started as a director of real estate investment company Property Trust in the 1980s and has been referred to as a billionaire by Forbes magazine. He was among the investors who benefited from the property boom that was fueled by the growth of securitization.

Halabi’s assets include the Naval and Military Club on London’s Piccadilly, and Mentmore Towers, the former home of Baron Mayer de Rothschild in Buckinghamshire, England. He was one of the original backers of the planned London skyscraper called the Shard, before selling his stake last year.

Hatfield Philips, the manager of the Halabi bonds, allowed them 10 working days to fix the default after they breached the loan-to-value covenants. The bonds mature in 2012, according to Bloomberg data.

Forced to Sell

Halabi’s companies are unlikely to repay the bonds and will probably be forced to sell the underlying properties, Fitch’s Currie said. The offices, mainly in the London’s financial district and the city’s West End shopping area, were valued at 929 million pounds as of June 8, down from 1.83 billion pounds in October 2006, according to a June 19 statement.

Kamlesh Bathia, finance director at Halabi’s investment company, Buckingham Securities Holdings Plc, wasn’t immediately available to comment.

“This is the biggest single-borrower CMBS loan default yet and could potentially see massive losses for most junior bondholders,” said Hans Vrensen, head of securitization at Barclays Capital. “It will be precedent setting.”

Mortgage-backed securities typically have bullet payments, where the borrower repays all the principal at maturity, meaning banks’ willingness to refinance the loans is often crucial to borrowers’ survival. About 43 billion pounds, or 19 percent, of all U.K. commercial real-estate loans come due this year, with another 60 billion pounds maturing in 2010 and 2011, London- based analysts at BNP Paribas SA wrote in a note to clients on June 23.

Fifteen percent of commercial mortgage-backed bonds in the U.K. have already failed loan-to-value covenants, Fitch data show.

“The intention of the loan-to-value covenant is to provide some form of early warning of increased risk,” said Currie. “It’s at the discretion of the servicer to decide whether or not to exercise the right to test, and in most cases they’ve been deciding not to.”

To contact the reporters on this story: Chris Bourke in London at cbourke4@bloomberg.net; To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: July 3, 2009 07:19 EDT